Home  >  Mortgage Resources  >  Jumbo Mortgage  >  Jumbo ARM Mortgage Loan

Jumbo Adjustable Rate Mortgage - Choosing the Best 3/1, 5/1, 7/1 or 10/1 ARM

Should I get a 3/1, 5/1, 7/1 or 10/1 Jumbo ARM in this market?

Many jumbo mortgage borrowers select adjustable rate mortgages (ARMs) where the interest rate is fixed for an initial period of 3, 5, 7 or 10 years. After the initial fixed rate period, the interest rate can go up or down each year depending on current market interest rates. Which jumbo ARM rate option is best can be determined by answering a few simple questions.

What is your tolerance for interest rate changes?

If you do not want the worry about having the possibility of your rate and payment changing in the future, then perhaps you should consider a 30 year fixed rate mortgage instead of an ARM. For jumbo loan borrowers, fixed rate loans can be substantially higher than adjustable rate loans, so there is a price to be paid in exchange for eliminating interest rate risk.

For example, right now 5/1 ARMs range between 4% and 5% while most 30 year fixed rate jumbo loans are 6% or higher. On a $700,000 loan, that can make a difference in monthly payments of anywhere from $400 to $800 per month. Most jumbo ARM loan borrowers would rather save (and invest) the $24,000 to $32,000 they save by going with the ARM instead of the fixed rate loan, while other borrowers do not want the chance that their payment go up at all.

Can you survive an interest rate change at the end of the initial fixed rate period?

You also have to ask yourself honestly whether or not you can actually afford payment changes assuming you will still have the same loan when the rate changes and you have not moved or refinanced. Most ARM loans today can only change by 1% or 2% per year once the initial fixed rate period is over. On top of that, many jumbo ARM loans that start out interest only during the initial fixed rate term then change to fully amortizing when the first interest rate change occurs.

How bad can the change be? A borrower with an $800,000 interest only jumbo 5/1 ARM loan that starts out a 4.5% would have a monthly payment of $3,000. If rates increase by 2% in the sixth year and the loan also goes to fully amortizing, that same payment would go from $3,000 to $5,056. That is a 68% increase in the monthly payment. It is critically important that jumbo loan borrowers understand how dramatically the payments on these loan programs can change. If you cannot survive this type of payment change, then you should strongly consider avoiding this type of loan program.

How long do you plan to keep your home?

If you plan to move within a few years then you may be more comfortable with a jumbo ARM. However, home owners need to plan for extended selling time periods - especially for higher-price d homes. The best rule of thumb is to select a loan program where the initial fixed term rate is at least one year longer than when you expect to sell your home.

How do I select between 3/1, 5/1, 7/1 or 10/1 Jumbo Mortgage ARM?

Once you have decided that a jumbo ARM is best for your needs, the next step is to select how long your initial fixed interest rate period will be. Basically, the shorter the initial fixed rate term, the lower the rate will be. In the past, there had been a relatively large difference between each of these programs. In the current interest rate environment the rates on the 3/1 and 5/1 jumbo ARMs have been almost identical, so it does not make sense to select a 3/1 ARM.

The rates on the 10/1 ARMs have been almost the same as the jumbo 30 year fixed rate loans, so it would probably make more sense to go with a 30 year fixed rate loan if you wanted the rate fixed for at least 10 years. The 7/1 jumbo ARM rates are usually about one half percent higher than the 5/1 jumbo ARMS, so the choice basically boils down to whether to select a 5/1 jumbo ARM to get the lowest rate or a 7/1 jumbo ARM and "buy" two extra years of rate protection with the slightly higher rate.

Trying to predict future interest rates - especially six to eight years into the future - is a guessing game at best. We recommend following the guidelines outlined above when selecting the best jumbo ARM mortgage loan for your home financing needs.

Finding the lowest Jumbo Mortgage Rates

To see the current mortgage rates, visit our Current Mortgage Rates page.

If you have any questions that you would like to get answered by our expert mortgage brokers, please email us or call us at 1-877-868-2503.

Our visitors also found the following articles relevent to this topic:

• Mortgage Refinancing FAQs
• Refinance Mortgage Loan
• Four Common Types of Refinance Mortgages